MILAN/PARIS, Oct 14 A leading European airline
group denounced Italian plans to rescue Alitalia as illegal on
Monday, as shareholders were due to vote on a capital increase
to keep the near-bankrupt carrier flying.

International Airlines Group, which owns British
Airways and Spain's Iberia, urged the European Commission to
intervene over the Italian government's attempts to stitch
together a bailout for Alitalia.

A 300 million euro ($407 million) capital increase forms a
major part of the rescue, which aims to keep Alitalia alive
while it works out how to ensure its long-term survival, but the
participation of its top investor Air France-KLM
remains far from certain.

IAG said the rescue breaks European Union rules. "We have
always been opposed to state aid," said a spokeswoman for IAG,
Europe's third biggest airline group by market value. "It's
protectionist, undermines competition and favours failing
airlines that have not got to grips with economic reality."

"We would urge and expect the EU Commission to take interim
measures to suspend this manifestly illegal aid," she added.

In Brussels, the Commission said it expected Italian
authorities to inform it of the plan. "Only after receiving the
notification will we be able to assess its compatibility with EU
state aid rules," Antoine Colombani, EU Commission spokesman for
competition policy, said in an email.

Alitalia, which last turned a profit over a decade ago, was
thrown a lifeline on Friday when its board members - including
Air France-KLM - approved the government-led 500-million-euro
bailout. The emergency plan includes the capital increase and
loans worth 200 million euros.

However, all shareholders have 30 days to decide how much
money to sink into the issue of new shares. Even if they support
Monday's vote, they remain under no obligation to take part
later in the cash call.

Air France-KLM, which owns a 25 percent stake and backed the
bailout plan when it was presented to Alitalia's board last
week, said it would decide on whether to participate only after
Monday's shareholder meeting.

The Franco-Dutch airline said on Friday it would set "very
strict" conditions before giving any help. Air France-KLM was
concerned about the lack of clarity on Alitalia's valuation and
insisted on much tougher restructuring, believing the emergency
plan was not enough, sources close to the matter said.

"We still don't see how Alitalia could meet any of Air
France-KLM's conditions," one source said, adding any decision
would still require a meeting of the Franco-Dutch group's board.

Alitalia is valued at between zero and 150 million euros,
according to a study by Credit Suisse commissioned by the
airline, a source close to the matter said.

Italy brought in the state-owned post office last week to
help save Alitalia. Taking into account a bond convertible into
equity subscribed by shareholders for 95 million euros this
year, the post office could get a stake of between 14-19 percent
if it put a promised 75 million euros into the cash call.

If Air France-KLM does not participate, it risks being
overtaken by Poste Italiane as the top shareholder and its
stake could drop below 15 percent. This would mean it would
effectively lose its veto power on new shareholders coming in.

STRATEGIC PARTNER

Any of Air France-KLM's strict conditions could clash with
Alitalia's long-haul ambitions, analysts said.

Alitalia's new CEO Gabriele Del Torchio wants the company to
focus on the higher-margin long-haul market after its plans to
become a strong regional player came unstuck due to tough
competition from low cost players and high-speed trains.

Analysts said Air France-KLM remained the natural strategic
partner for Alitalia, but the group's appetite was limited as it
pushes through its own unpopular restructuring at home.

"I am sure they would strategically want to have Alitalia in
their camp, but the last thing they want at the moment is to
consolidate a rotting company," said airlines expert James
Halstead, managing partner at UK-based Aviation Strategy Ltd.

A cash call without Air France-KLM would raise the
uncertainty over Alitalia's future as it was meant to be only a
stop-gap solution before talks on a possible tie-up of the two.

The cash will probably not last long and Alitalia needs a
partner such as Air France-KLM to boost its long-term prospects.

The support of Alitalia's domestic investors for the capital
increase is also in the balance. Its second biggest shareholder,
the Riva family, has had its assets seized in a judicial
investigation, including its Alitalia's 11 percent stake.

The airline is currently owned by a disparate group of 21
investors including bank Intesa Sanpaolo and highway
operator Atlantia, a consortium pulled together in 2008
by then prime minister Silvio Berlusconi after he rejected a
takeover by Air France-KLM.

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